As the Senate prepares to debate the Finance Committee's tax reform plan, every special interest has deployed its lobbyists to Capitol Hill to preserve its favorite tax break. Every interest but one: no fancy Washington law firm has been retained to represent the poor.
Fortunately, the Finance Committee's plan already contains enlightened tax policy changes for those near the bottom. The increases in the standard deduction and the personal exemption will eliminate the income tax liabilities of roughly 6 million low-income filing units. But, at little cost, the full Senate can do even better and transform the committee's plan into a truly revolutionary advance for the low-income population, one that would significantly encourage work, help stabilize family life and reduce poverty.
This can be accomplished by allowing the Finance Committee's proposed enhancement of the Earned Income Tax Credit to vary by family size. The EITC is a provision of the tax code that offers low-income families with children a credit equal to 11 percent of their first $5,000 of earnings. This credit, which has a maximum value of $550 regardless of family size, is gradually phased out as a family's income rises from $6,500 to $11,000. For some low-income families, the credit reduces the taxes they owe. For others -- those whose incomes are too low to owe any taxes and those whose tax liabilities are smaller than their credit -- the IRS provides a refund check. Thus the EITC amounts to a modest wage supplement.
The population that would be helped by an enhanced EITC -- poor working families -- has grown distressingly in recent years. Between 1978 and 1984, the number of families who worked but earned too little to lift themselves out of poverty rose fairly steadily from 2.6 million to 3.6 million. The number who worked at full-time, year-round jobs and still found themselves in poverty increased from 859,000 to 1.2 million.
The ranks of the working poor have grown because more workers are experiencing temporary unemployment and because the recent performance of wages for low-skilled jobs has been dismal. The average hourly earnings of the nation's production and nonsupervisory workers (some 66 million people) did not keep pace with inflation in either 1984 or 1985 and have fallen 6.2 percent in real terms since 1978. The minimum wage, frozen at $3.35 an hour since January 1981, has lost one-quarter of its purchasing power since Ronald Reagan became president.
A single mother with only one child cannot earn enough working full-time at a minimum-wage job to escape poverty. Such a job provides a family of four with only 63 percent of the income needed to reach the poverty threshold. Roughly four out of 10 of the nation's 55 million hourly-wage jobs did not pay enough to support a family of four above the poverty threshold in 1985. With pay so low for so many, it is not surprising that many single mothers find it difficult to escape from welfare dependency and many low-skilled young men find it impossible to support the families they have created.
One response to the problem faced by the working poor would be to raise the minimum wage. While this would help those earning the minimum or slightly higher wages, many of these workers do not need a pay raise. The middle-class teen-ager with a part-time job at the mall is a case in point. Increasing the minimum wage would do little for the family of four whose breadwinner works full-time for $4.50 an hour to bring home a paycheck equivalent to only 80 percent of the poverty level. Furthermore, a rise in the minimum wage would cause some employers to conclude that some of their least-skilled workers, many of whom are minority youth, aren't worth the higher costs.
A better approach is to allow the EITC to vary by family size. The Finance Committee's plan already increases the credit from 11 percent to 14 percent of earnings and extends the range over which the credit is phased out. The credit could be increased to 14 percent for a working parent in a two-person family, 16 percent for a three-person family, 18 percent for a four-person family and 20 percent for a family of five or more.
The single mother with a child would be encouraged to work through a more generous wage supplement than she now receives. The young man with a low-wage job who had just fathered a child would realize a 16 percent increase in take-home pay if he married his child's mother. The large family struggling along with both the parents working at low-wage jobs would be rewarded by escaping poverty for the first time.
Employers can't vary individual wage rates according to the family responsibilities of their workers. However, the resources needed to survive do increase with family size. The tax system takes this into account for the middle and upper classes. For families with equal incomes, the tax burden imposed on large families is lower than that placed on small families, thereby leaving the large family with more disposable income. The tax reform plan offers an opportunity to provide the same benefit for poor working families. It's time to put our tax money where our values are, to encourage work and family stability over welfare, and to reduce poverty among those who are doing what society wants.